Electric Kool-Aid acid test

Tesla’s offer to buy SolarCity cements Elon Musk’s status as a mad scientist. The electric-car company he runs has bid up to $2.8 billion for the solar-panel installer he also backs. The idea of a renewable-energy roll-up is at best way too early and at worst just plain bonkers.

Musk owns about a fifth of both companies, is a co-founder and chairman of SolarCity and runs $33 billion Tesla Motors. A third Musk enterprise, rocket maker Space Exploration Technologies, has been buying debt in SolarCity, according to a report earlier this year in the Wall Street Journal. The merger proposal raises the financial intricacy toward the level of the circuitry in the SpaceX launch vehicle.

At the high end of the exchange ratio range proposed by Tesla, it would hand over shares worth $28.50 apiece for SolarCity, a company whose stock was trading at about $85 little more than two years ago. But investors don’t seem to consider that a bargain. In the hours after the idea of combining the two companies was unveiled, Tesla lost more than $4 billion of market value.

At least overlapping directors are withdrawing and leaving the decision to disinterested board members and eventually shareholders of both companies. Based on the market reaction, though, the obvious interpretation is that the offer looks like a way to prop up SolarCity’s stock at the expense of the higher-flying Tesla.

In arguing for the deal, Tesla envisions a one-stop, clean-energy shop selling cars, batteries and the power of the sun. And yet it’s hard to see any reason to buy all three from one place, even though Tesla claims that its drivers are “naturally interested” in going solar. Any design and manufacturing overlap – in batteries, say – probably affords only marginally better financial benefits than the “shared ideals” Tesla also is touting.

In reality, each company faces unique problems. SolarCity is burning cash as it struggles to find as many customers as quickly as it had hoped. Tesla, meanwhile, is trying to meet the ambitious goal of producing 500,000 vehicles a year by 2018. With capital expenditures approaching $2 billion last year, it’s no surprise the carmaker is also cash-flow negative. Whether there are unspoken motives or it’s the overwrought creation of an excitable mind, combining the two is the wrong sort of innovative engineering.

Source:

Elon Musk, Chairman of SolarCity and CEO of Tesla Motors, speaks at SolarCity's Inside Energy Summit in Manhattan, New York October 2, 2015. SolarCity on Friday said it had built a solar panel that is the most efficient in the industry at transforming sunlight into electricity. REUTERS/Rashid Umar Abbasi - RTS2SR3

Related Links

Breakingviews is not responsible for the content of external internet sites.

Context News

Tesla Motors on June 21 offered to buy SolarCity for up to $2.8 billion in stock, in a deal that would unite two publicly traded companies backed by Elon Musk. Under the terms of the bid, Tesla would exchange about 0.122 to 0.131 of its own shares for each SolarCity share, or from $26.50 to $28.50 a share using Tesla’s five-day average stock price.

Musk is the biggest shareholder in both companies with about a 19.5 percent stake in Tesla and 22.2 percent of SolarCity, according to Thomson Reuters data.

Tesla said that it is prepared to make any merger subject to the approval of a majority of disinterested stockholders of both SolarCity and Tesla. It said Musk and Antonio Gracias, who are directors of both companies, had recused themselves from voting on the proposal at the Tesla board meeting at which it was approved, and would do the same at SolarCity as well.

SolarCity said it would “carefully evaluate” the proposal.

In late trading as of 6:10 p.m. EDT, Tesla’s stock had fallen over 10 percent, while SolarCity’s was up more than 16 percent.